Cost Principles Procedures
Introduction
The purpose of the Cost Principles Procedure is to ensure compliance with U.S. Office of Management and Budget’s Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR, Chapter II, Part 200, Uniform Guidance) and Title 48 CFR Part 9905-Cost Accounting Standards for Educational Institutions. Failure to adhere to these cost principles and practices may result in cost disallowance, penalties, and/or fines. This procedure establishes consistent practices for defining and charging direct and indirect costs to university funds. In accepting a sponsored project, principal investigators, project directors, departmental administrators and Rice University agree to follow the cost principles defined by the sponsoring agency. Allowability of costs can vary by sponsor, therefore it is imperative that the sponsor requirements contained in each and every award agreement be understood and followed.
Application
These practices must be consistently applied in like circumstances for all sponsored projects and any other institutional activity affecting sponsored projects (2 CFR 200.403(c)).
While the Principal Investigator has primary responsibility for overseeing the expenditure of project funds, all personnel involved in charging costs to sponsored funds must comply with this procedure in order to meet federal costing standards and ensure that costs are allocated in a manner that accurately reflects the expenses incurred for the benefit of the project.
As stated in the Uniform Guidance (2 CFR 200.412) “There is no universal rule for classifying certain costs as either direct or indirect (F&A) under every accounting system. A cost may be direct with respect to some specific service or function, but indirect with respect to the Federal award or other final cost objective. Therefore, it is essential that each item of cost incurred for the same purpose be treated consistently in like circumstances either as a direct or an indirect (F&A) cost in order to avoid possible double-charging of Federal awards.”
The primary responsibility for the sound fiscal management, as well as the programmatic direction, of a sponsored project belongs to the individual faculty member who is the grant or contract principal investigator. It is the responsibility of the principal investigator or project director to ensure that only allowable, reasonable and allocable direct costs are charged to a sponsored project.
Uniform Guidance, 2 CFR 200.403(g) states that for an expense to be allowable on a Federal award, it must be adequately documented. Documentation for all project-related expenses, including cost sharing, must be maintained by the principal investigator’s department in accordance with Rice University Records Management policies. This would include, but not be limited to: receipts or copies of receipts, for all purchases, regardless of dollar amount.
Uniform Guidance definitions related to cost principles
Allocable Costs (200.405)
A cost is allocable if the goods or services are charged to an award in proportion to the relative benefits received. The Uniform Guidance states the allocation standard is met if the cost:
- Is incurred specifically for the award
- Is charged using direct cost allocation principles.
- When a cost benefits multiple projects or a combination of projects and programs, and the cost can be distributed in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects or programs based on the proportionate benefit.
- If the proportions cannot be easily determined, the cost may be allocable to the projects or programs receiving the benefit on any reasonable documented basis.
- Allocation across awards cannot be based simply on funding availability.
Allowable Costs (200.403)
The Uniform Guidance outlines the following general criteria that must be met for costs to be allowable:
- Be necessary and reasonable for the performance of the award and be allocable to the award.
- Conform to any limitations or exclusions set forth in the Uniform Guidance or the sponsor agreement.
- Be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the institution.
- Be afforded consistent treatment. A cost may not be assigned to a Federal award as a direct cost if any other cost incurred for the same purpose in like circumstances has been allocated to a Federal award as an indirect (F&A) cost.
- Be determined in accordance with Generally Accepted Accounting Principles (GAAP).
- Not be used to meet cost sharing requirements.
- Be adequately documented.
Applicable Credits (200.406)
Applicable credits refer to those receipts or reduction-of-expenditure type transactions that offset or reduce expense items allocable to the Federal award as direct or indirect (F&A) costs. Examples of such transactions are: purchase discounts, rebates or allowances, recoveries or indemnities on losses, insurance refunds or rebates, and adjustments of overpayments or erroneous charges. To the extent that such credits accrued to or received by the non-Federal entity relate to allowable costs, they must be credited to the Federal award either as a cost reduction or cash refund, as appropriate.
Direct Costs (200.413)
Direct costs are those costs that can be identified specifically with a final cost objective - such as a Federal award, or some other internally or externally funded activity - or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect (F&A) costs.
Facilities & Administrative Costs (200.56)
Costs incurred for a common or joint purpose benefiting more than one cost objective, not readily assignable to the cost objectives specifically benefited without effort disproportionate to the results achieved. Uniform Guidance specifically identifies that office supplies, postage, local telephone costs, and memberships must normally be treated as indirect (F&A) costs. (2 CFR 200 Appendix III.B.6.b.(2)).
Limitation on Allowance of Costs (200.408)
Federal awards may be subject to statutory requirements that limit the allowability of costs. When the maximum amount allowable under a limitation is less than the total amount determined in accordance with the principles in this part, the amount not recoverable under a Federal award may not be charged to [that or any other] Federal award. For example, if an agency caps the amount of institutional base salary that can be used to calculate the costs of effort on a grant, individuals with a salary that exceeds the cap cannot charge the remainder of their salary from effort on that award to this or any other Federal award.
Reasonable Costs (200.404)
A cost is reasonable if, in nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. The Uniform Guidance lists the following items to be taken into consideration in determining the reasonableness of a cost:
- Whether the cost generally recognized as ordinary and necessary for the operation of the organization or the proper and efficient performance of the award.
- The requirements of sound business practices, arm’s length bargaining; applicable laws and regulations, and terms and conditions
- Market prices for comparable goods or services for the geographic area
- Whether the individual acted with prudence
- Whether the institution significantly deviates from established Procedure and procedures, which may unjustifiably increase the award’s costs
Total Cost (200.402)
The total cost of a Federal award is the sum of the allowable direct and allocable indirect (F&A) costs, less any applicable credits.